Making Market Predictions? Predict Often And You'll Be Right

by: Ron Sanders

After the U.S. equity market sell-off in late July, the first week in August was slow-going. But, the market recovered to finish with a 4.2% return for the month, making August the second-strongest month of the year for U.S. equities after February. The S&P 500® Index also hit a new milestone when it surpassed 2000 points on August 25. As a whole, the month served as a good reminder of how difficult it is to anticipate a sell-off and short-term market rebound.

Non-U.S. stocks returned 0.2% for the month and lagged U.S. stocks by 4.0% and emerging market stocks by 2.1% for the month. This is consistent with the year-to-date returns as well where U.S. stocks (represented by the Russell 3000®Index) have led non-U.S. stocks by 5.5% and Emerging market stocks have led non-U.S. stocks by 7.1%.

Global REITs are the strongest performers year-to–date as of August, with the FTSE EPRA/NAREIT Developed Real Estate Index up 13.7% [1].

Capital Market Returns chartjpg

Best-performing asset class in August: U.S. Equity

The U.S. equity market was the strongest performer in August. Small cap U.S. stocks (represented by the Russell 2000®Index, which returned 4.96% for the month) led large cap stocks (represented by the Russell 1000® Index, which returned 4.13% in August) by an 83 basis point margin.

Worst-performing asset class in August: Commodities

Commodities were the worst performing asset class in August, returning -1.05% as measured by the Bloomberg Commodity Total Return Index. The strong U.S. dollar and weaker demand from China adversely affected energy prices during the month. Agriculture prices softened due to increased supply, mostly due to improved farming conditions in the U.S.

Asset Class Dashboard – August 2014

One-year returns for all asset classes remained within their typical historical range (blue range bar) despite the strong run financial markets have been experiencing, the one exception being cash. In other words, even though equity markets have reached new highs in 2014, the magnitude of those returns appears in line with historical norms for 1-year returns.

This month’s reading of the Asset Class Dashboard shows that all equity markets are above their 12-month historical average as of August 31. As mentioned above, cash falls below of its historical typical range with a 0.0% return, but until interest rates change, this should be expected. Further, only Commodities have had a negative return over the last 12-month period, however, the -2.9% return is within the typical range investors could expect.

Asset Class Dashboard August 2014

The bottom line

August was a strong month for U.S. equities, right on the heels of July’s sell-off. The quick rebound in equities demonstrates the difficulty in timing the market – and the importance of staying invested.

As always, asset class returns are difficult to predict and having diverse exposures to non-correlated assets may contribute to a well-diversified investment portfolio that can weather many different market environments.

The old saying is, if you’re going to make predictions about the market, be sure to predict often. Eventually, you’ll be right.

Disclosure: None


[1] As of August 31, 2014. Sources: U.S. Equity: Russell 3000® Index; Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index; Emerging Markets: Russell Emerging Markets Index; U.S. Bonds: Barclays U.S. Aggregate Bond Index; Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index; Commodities: Bloomberg Commodity Index Total Return; Hypothetical balanced portfolio: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

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